1. Over the past 40 years interest rates in the developed world have fallen to very low levels. One argument for this is rising income inequality which has led to imbalances in savings and insufficient aggregate demand. Take the following Keynesian consumption functions for the "poor" (P) and "rich" (R) as given c' = Č+c°y®, (1) CR = Č+ c®y®. (2) Suppose that C is the same for both poor and rich. Further suppose that c > ck and define aggregate demand as the sum of CP and CR. Based on the above, could a rise in income inequality explain "insufficient demand"? Ex- plain.'

1. Over the past 40 years interest rates in the developed world have fallen to very low levels. One argument for this is rising income inequality which has led to imbalances in savings and insufficient aggregate demand. Take the following Keynesian consumption functions for the "poor" (P) and "rich" (R) as given c' = Č+c°y®, (1) CR = Č+ c®y®. (2) Suppose that C is the same for both poor and rich. Further suppose that c > ck and define aggregate demand as the sum of CP and CR. Based on the above, could a rise in income inequality explain "insufficient demand"? Ex- plain.'

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter10: Keynesian Macroeconomics And Economic Instability: A Critique Of The Self Regulating Economy

Section: Chapter Questions

Problem 7QP

See similar textbooks

Similar questions

1. Consider the following simple Keynesian model, (i) Rewrite the model into matrix form with Y, C and I as endogenous variables and Go and i as exogenous variables. (The coefficient matrix must be a 3 by 3 matrix.) Y=C+I+Go C = 200+ 0.8Y I= 1000-2000 (ii) Compute the equilibria Y*, C* and I* as functions of Go and i using Cramer's rule. 8Y* (iii) Find and di ƏY* ƏGo (iv) Give an economic interpretation of national income? ƏY* " ƏGo what should the government do if it wants to raise
10 . In the “complete Keynesian model”, the investment functions was I = I0 - f(i). An analyst now proposes the following investment function: I = I0 - f(i) + qY, where “q” is a parameter and Y is national income = GDP. Provide two different arguments, i.e. explanations as to why this investment function makes sense. The focus is on the new term, qY (q times Y), in the function.
Let’s analyze the rational behavior and well-being of 3 different individuals in regards to their saving and borrowing behavior. I recommend drawing the intertemporal consumption model graph for each of the following situations. We will be analyzing three individuals; Charlie is saving at the current interest rate, Allison is borrowing at the current interest rate, and Chris is neither saving nor borrowing at the current interest rate. (a) Charlie is currently saving money (spending less than his current income) at the current interest rate. Will he be made better off if the interest rate subsequently increases? (b) Allison is currently borrowing money (spending more than her current income) at the current interest rate. Will she be made better off if the interest rate subsequently increases? (c) Chris is currently neither saving nor borrowing (spending exactly his current income) at the current interest rate. Will he be made better off if the interest rate subsequently increases?…
Consider the following model. Expenditure is given by: E = C +1 + G. The consumption function is specified as: C = c0 +cY. We assume a closed macroeconomics system so that: Y=E. If the model parameters are configured such that I= 500, G=2000, c0=1000 and c=0.8, what will the level of consumption expenditure, C, be equal to? a. 4,375 b. 15,000 c. 14,000 Cd. 14,500
1. According to Keynes, what is the most important determinant of (or influence on) the level of Consumer Spending households undertake in a time period? 2. Use the following Consumption function data to answer the questions below: Real Disposable Income Consumption Saving MPC MPS $100 $150 $200 $200 $300 $250 $400 $300 $500 $350 A. What is Saving if Real Disposable Income = $400. What is Saving if Yd = 500? B. What is the marginal propensity to consume (MPC)? C. What is the marginal propensity to save (MPS)? D. What is the break-even income (level of income at which Saving = 0)? E. What is the mathematical relation between the MPC and the MPS? 3. Suppose most business executives expect a slowdown in the economy (slower sales…
Assume an economy were characterized by the following equations C = C + bYD I=Ī - di G=G T=T X=X IM= Z +fY MD= a + Bi+yY MS=Ⓒ P = 1 (1) (2) (3) (4) (5) (6) (7) (8) (9) where the notation denoting parameters C,b,1,d,e,G,T,X,Z,f,a, ß,y, are all positive and YD denotes disposable income. We assume that 0
Mathematical economics: For an economy the following consumption function is given : C = 60+0.75 Y. %3D (a) If investment in a year is $35 crores, what will be the equilibrium level of income or output ? (b) If full-employment level of income (i.e., level of potential output) is $460 crores, what investment is required to be undertaken to ensure equilibrium at full employment ?
What happens in the simple Keynesian model if households expect lower income in the future and decide to save more today? Adjust the graph and answer the question. Assume that investment varies directly with aggregate income. Aggregate expenditure (in billions of dollars) 10 9 8 7 5 4 3 2 1 0 0 1 2 3 4 5 6 7 Aggregate income (in billions of dollars) 8 9 AE = AI C+1 10
The following are exogenous (not directly affected by income): G = 9 I = 14 X = M = 0 The consumption function is: C = k + cY, where k = 8, c = 0.6 What is the equilibrium level of GDP? State to ONE decimal place What is the multiplier for this economy? The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 What is the equilibrium level of GDP? What is the multiplier? Same information as in the previous question: The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 Imagine the maximum potential output or real GDP of this economy is 100. Assume that is the same as saying we reach the edge of the PPF at 100. Now assume we want to get that economy from the current level of GDP to its maximum potential of 100. We can do this in two ways - either increase government spending (G) or reduce taxes, (we…
QUESTIONS GO WITH GRAPH 1. Given this diagram of Consumption and Savings functions, what is the mpc (marginal propensity to consume? 2. Given this diagram of Consumption and Savings functions, What is the level of Ca (autonomous consumption)? 3. Given this diagram of Consumption and Savings functions, What is the level of "induced consumption" at income level of 40?
An economy is characterised by the following equations: C = c0 + c1YD YD = Y-TI = bo+b1Y Government spending (G) and taxes (T) are constant, while investment (I) is proportional to output (Y). Solve for the equilibrium output Derive the Keynesian multiplier for G, and discuss how is the value of the multiplier affected by the relationship between investment and output? S E
We again assume asimple closed economy with GDP of 100 and:c0(autonomous consumption) = 20c1 (marginal propensity to consume) = 0.6I (investment) = 20.a) Now assume that c0falls by 5 (i.e. 5% of GDP), i.e. for any given level of output,consumption will fall by 5. Show the implied fall in the AD function in yourdiagram and show that output will fall by more than 5.b) Show that the multiplier is equal to 2.5, and hence that, in the new equilibrium,output will have fallen by 12.5 (i.e. by 12.5%)c) How big would the impact be if, say, c1 = 0.4 or c1 = 0.8? Explain the difference.